Investors want advisers who will give them emotional as well as financial support

Investors want advisers who will give them emotional as well as financial support


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In the past, investors were usually focused solely on investment returns, i.e., trying to beat the S&P 500 or other indexes. In today’s world, however, financial advisers must not only outperform the S&P 500 but help support overwhelmed investors as they try to navigate past uncertain financial environments.

This means that advisers must keep investors calm when the stock market is volatile but also reduce investor fears — not only the fear of losing money, but also the fear of missing out on the latest hot investment (i.e., FOMO).

What behavior researchers have learned

Equities News spoke with Morningstar behavioral researchers Samantha Lamas and Danielle Labotka on how the job of financial advisors has changed — and what modern investors expect from them. Lamas and Labotka, with Ryan O. Murphy, were authors of the Morningstar research report, “Navigating the Client Lifecycle in Financial Advice,” (June, 2024).

Samantha Lamas

A key finding of their research is the huge role that emotions play in hiring, firing or blaming advisers when investments go south. “There are a lot of gaps with what investors are expecting from their advisers,” Lamas said. “Those gaps can be filled with a stronger emotional connection with investors.”

Labotka added that investors who feel they can trust their advisers to reach their financial goals were more likely to retain them. “Emotions have always been an issue with investors when it comes to financial goals, or being worried about whether they can retire. People believe advisers can do much more than just handle their finances.”

Information overload

Because of the internet, people have much more information at their disposal than in the past. Unfortunately, there is also the risk of information overload.

“We have all these trading apps, which allow you to quickly make decisions,” Lamas says. “Before, you had to make a call or go to someone’s office. Now, there are so many potential pitfalls when investing. Many people are leaning on advisers to help them sort through a lot of data and programs.”

“It’s difficult for many investors to make good decisions when there is so much noise out there. Many people rely on advisers to help structure their investments, act as a sounding board and make sense of all of that information coming at them.”

One of the problems, both researchers say, is that investors have access to so many trading tools. This causes some people to chase after returns, and trade even more. One of the roles of advisers is to help reduce the desire to trade, what some have called a “gambling instinct.” That is why many advisers must not only manage money and expectations, but also act as “behavioral coaches.”

“When the market is volatile,” Lamas says, “it’s easy for investors to get overly emotional. That is when the adviser must give behavioral guidance.”

Danielle Labotka

Labotka agreed: “We did a study on why people chase after the returns of alternative investments such as cryptocurrencies. Some people get excited when everyone is talking about a certain investment, and they don’t want to miss out on a meme stock or cryptocurrency. It’s easy to make mistakes in this emotional environment. One of the roles of financial advisers is to help investors control their emotions.”

One way that some advisers deal with overtrading is by giving these clients a small sum of money to “play” with. This allows clients to invest in trendy but risky financial products such as cryptocurrencies, but without affecting diversification formulas. “Don’t put all of your eggs in one basket,” Labotka noted, “but here’s one egg that you can play around with.”

More than stock pickers

“Our research shows that financial advisers are being asked to do more than just stock picking,” Lamas says. “Honestly, we think this is a great thing for advisers because it sets them apart from robo-advisers. A chatbot can’t give you peace of mind when the market is volatile, at least not now, but you never know what will happen in the future.”

Labotka explained that “financial advisers must know clients better than clients know themselves. They have to understand what their goals and needs are, which can take a long time if they want to get it right.”

She added that advisers must also point out potential pitfalls while also helping clients recognize behavior that may be damaging to their portfolio. “In many ways, a financial adviser also has to be a mind reader.”

It’s also important that advisers don’t overpromise potential returns. “Overpromising is a big red flag,” Labotka warns. She says the last thing an adviser wants to do is make false promises, or fail to help the client reach their financial goals.

Not only must advisers outperform the indexes, but many modern investors want more personalized guidance, and may even need some “handholding” during difficult times, which could be a volatile market environment, or a change in a client’s personal finances. It’s normal for investors to feel nervous and afraid at times, and that’s when professional advisers can help.

When markets get volatile again

It’s surprising, but they cite research that showed that when the market is underperforming such as during a bear market, or during the 2008 – 2009 Great Recession, most people didn’t fire their advisers. “We will have to see if people will still stick with their advisers when the market is less forgiving,” Labotka says.

They confirm that no one can predict how investors will react when the market struggles in the future, especially since returns have been so excellent for so long. “Many advisers have long recognized their clients are emotional beings, and imperfect, because we are human,” Labotka points out.

It’s the adviser’s job to keep clients calm during the rough times and curb their enthusiasm during the good times.

“I believe that investors can look at the research and feel empowered. They should not only receive financial expertise from their advisers but also receive emotional support,” Lamas said. “If an adviser isn’t providing that, then find someone else who will.”